King Dollar Powers Forward

• The US March CPI print suggests that progress on inflation may be stalling. Today’s US March PPI report can reinforce that message.

• The ECB is expected to leave the policy rate at 4.00% today. President Lagarde’s press conference will be scrutinized for any hints about the timing and scope of future interest rate cuts.

• Jawboning on the yen continues as USD/JPY surges to new highs.

USD and Treasury yields (2 and 10-year) are up near their highest level since mid-November 2023 following yesterday’s hotter-than-expected US inflation. The US March CPI print suggests that progress on inflation may be stalling and sharply lowered odds of Fed funds rate cuts. Headline and core CPI rose a tick more than expected in March by 0.4% m/m to be up 3.5% y/y and 3.8%, respectively. Underlying inflation momentum also picked-up in March. The so-called super core CPI (core services less housing) increased 0.7% m/m after rising 0.5% in February and is up 4.8% y/y, the highest since April 2023.

Fed funds futures slashed the probability of a June rate cut to 20% (from roughly 60%) and imply less than two rate cuts this year (from almost three). The encouraging US growth outlook, resilient labour market and sticky inflation can lead to a further upward adjustment to US interest expectations in favour of a higher USD and Treasury yields.

Today’s US March PPI report (1:30pm London) is unlikely to raise the Fed’s confidence that inflation is moving sustainably down toward 2%. Headline PPI is expected to increase 0.3% m/m and quicken at an annual pace of 2.2% in March from 1.6% in February indicating companies are not absorbing higher input prices. The less volatile US core PPI (excludes food, energy & trade services) is projected to rise 0.2% m/m in March.

New York Fed President John Williams (1:45pm London), Richmond Fed President Thomas Barkin (3:00pm London), Boston Fed President Susan Collins (5:00pm London) and Atlanta Fed President Raphael Bostic (6:30pm London) will have an opportunity to share their thoughts today on the updated US inflation backdrop.

The release of the FOMC March meeting minutes did not generate much financial market volatility. Unsurprisingly, “almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year”. Indeed, the dot plot show only two Fed officials favoured no cuts. Interestingly, “some participants noted that the recent increases in inflation (January and February) had been relatively broad based and therefore should not be discounted as merely statistical aberrations”. More Fed officials will likely converge to that view following the strong March US CPI data.

The discussion around the pace of the Fed’s balance sheet reduction was informative. According to the minutes “the vast majority of participants thus judged it would be prudent to begin slowing the pace of runoff fairly soon”. “Participants generally favored reducing the monthly pace of runoff by roughly half from the recent overall pace” mainly by adjusting the redemption cap on US Treasury securities. As such, the monthly runoff in Treasury bonds is expected to slow to US$30bn from currently US$60bn. Slowing down the pace of balance sheet reduction reduces the probability that money markets experience undue stress and has no implications for the stance of monetary policy.

EUR/USD is heavy around 1.0745 ahead of the outcome of today’s ECB policy-setting meeting (1:15pm London) and ECB President Christine Lagarde’s press conference (1:45pm London). The ECB is expected to leave the policy rate at 4.00% and reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. The probability of a 25bps cut is low at under 5%. Indeed, most key ECB officials have telegraphed preference of a first rate cut in June as they would have more information on wage dynamics as well as updated macro forecasts. A June ECB rate cut is almost 90% priced-in.

GBP/USD can’t shake off broad USD strength despite hawkish rhetoric from Bank of England (BOE) policymaker Megan Greene. Green wrote in the Financial Time that rate cuts in the UK “should still be a way off”. Greene speaks on a panel later today about “lessons learnt from the last economic crisis” (5:30pm London). Up next the BOE’s Q1 Liabilities Survey (9:30am London).

USD/JPY broke through key resistance at 152.00 on USD strength. There is no major technical resistance level before 160.20 (April 1990 high) but the ongoing threat of intervention can cushion the yen’s slide. Japan’s top currency official Masato Kanda and Finance Minister Shunichi Suzuki both reiterated overnight their concern over excessive yen moves. Kanda added that recent FX moves are rapid, and the benefits of a weak yen are decreasing.

USD/CAD is holding on to yesterday’s gains and is trading just under 1.3700. The Bank of Canada (BOC) delivered a neutral hold yesterday, but Governor Tiff Macklem did not rule out a June rate cut, noting it was “in the realm of possibilities”. The money market places 60% odds of a June rate cut.

The BOC left the policy rate at 5.00%, as was widely expected. It was a neutral hold because: (i) The BOC is still concerned that lowering policy interest rate too early or cut too fast, could jeopardize the progress on inflation. (ii) The BOC lowered Q1 2024 CPI inflation (2.8% versus 3.2% previously) but still projects inflation to reach 2% by Q4 2025. (iii) The BOC boosted Q1 GDP growth forecast (2.8% saar versus 0.5% previously) on higher exports and consumption. (iv) The BOC raised its estimate of the nominal neutral interest rate by 25bps to a range of 2.25% to 3.25% in its annual April assessment. The OIS curve adjusted higher accordingly to imply a policy rate of 3.25% over the next three years.

China inflation virtually stalls in March indicative of weak domestic demand activity. Annual headline CPI inflation dropped to 0.1% in March (consensus: 0.4%) from 0.7% in February on falling food prices. Excluding food and energy, annual core CPI inflation eased to 0.6% from 1.2% in February.